It’s a staple of scores of Hollywood adventure films—rugged outdoor types paddling furiously downriver when suddenly they hear the roar of a mighty waterfall up ahead. Generations of moviegoers have sat on the edge of their seats, waiting breathlessly to see if the heroes would turn their canoes around in time.

Although they rarely rise to this level of cinematic thrill, there are fearsome cataracts in the modern business world too. And the consequences of going over these falls are no less dire. When executives of troubled companies fail to act in time, or fail to act at all, their companies’ performance keeps deteriorating until market valuation drops suddenly—and very publicly. It happens all the time, to companies large and small, to the iconic as well as the also-rans.

Contrary to what might be expected, no one is immune. Accenture research shows that at some point, most companies will experience a challenge that is significant enough to require substantial changes to the way they do business.

That businesses get in trouble isn’t news, of course. Neither is the fact that, in response, companies undertake some form of what they call “transformation.” But in most cases, this amounts to what are merely tactical changes, usually limited to region- or product-specific cost-cutting programs.

Our research has shown that many of these change programs are far from successful. We believe there are two reasons for this. First, these programs are not, in fact, transformational as we define the term: They do not fundamentally realign (or redesign) the companies’ underlying operating models with a goal of creating substantial value improvements (see chart, beside). Second, in many cases, the companies respond too late: They launch initiatives only after they have gone over the valuation waterfall.

One of the reasons for these belated responses is that the lag time between the onset of the problems and the point of no return can stretch anywhere from 18 months to four years, lulling executives into thinking that although things aren’t great, there’s no crisis—therefore, there’s no rush. Such delay is deadly; once the company begins its downward spiral (in performance and resulting market valuation), the decline can persist for years.

Even if struggling organizations do stabilize, it typically takes much longer to regain investors’ favor than it took those investors to notice the performance drop in the first place. That’s true even if the management team can inarguably demonstrate rising cash flow, earnings recovery, thicker order books and more. The confidence of the capital markets has been lost. In some cases, it never comes back.

Early warning signs
So how can companies avoid these disasters? We have observed critical early warning signs that, if promptly and properly recognized, can signal the need for fundamental transformation. We call these events “triggers” because they should lead senior executives to undertake far-reaching change.

There are three kinds of triggers.

• Financial triggers: When actual or expected financial results leave a company below its industry peers in terms of revenue growth and/or total shareholder returns.
• Internal organizational or operational triggers: When something happens within an organization that significantly lessens its chances of achieving or maintaining industry parity.
• Market triggers: When competitor, industry, customer or regulatory actions occur that challenge a company’s overall competitive position in a way that has affected, or will affect, its financial results.

Triggers are not necessarily discrete; multiple triggers often occur simultaneously. For example, disappointing financial results (a financial trigger) usually lead to major C-level changes (an organizational trigger); new competitive threats (a market trigger) usually require or drive improvements in organizational effectiveness (an operational trigger).

Failing to recognize these early warning signs can be disastrous. Accenture has studied in depth how companies have responded to one of the primary financial triggers: a significant slowdown in revenue growth.

Since 1975, fully 89 percent of companies in the Fortune 250 have, in fact, experienced such an inflection point (defined as greater than or equal to a 10 percent decline in the compound annual growth rate of revenue for a particular five-year period versus the prior five-year period—for example, CAGR from 2002–2007 compared with that for 1997–2002). Of those, more than 70 percent suffered revenue growth that fell below gross domestic product growth rates, or even became negative in the five-year period following the inflection point. And for many of those companies, the news was worse: Only 17 percent were able to recover and achieve growth rates greater than GDP growth rates by 2007 (see chart, below)

Even when companies recognize these triggers, they don’t always act quickly enough, as illustrated by the number of companies with recovery times of three to five years—the typical tenure of today’s CEOs. This may be because they are waiting to see if a financial shortfall will or will not be punished by the market. Such waiting is risky. One US food company, for example, experienced years of declining cash flow before its stock took a hit. By the time the company began to react and engage in true transformational change, it had been surpassed by its most important competitor in market valuation.

Pushing the button
Our research reveals that companies that proactively responded to these triggers not only avoided disaster but often reaped positive rewards. In many cases, the companies that were able to do this had launched fundamental transformation programs.

UnitedHealth Group is one such company. In 1998, its planned merger with Humana collapsed after it took a $900 million one-time charge to scale back some product offerings. A poor pricing environment for health maintenance services contributed to a $166 million loss for that year.

UnitedHealth responded decisively to this trigger, realigning into six separate, health-related businesses to allow for a greater focus on performance, growth and shareholder value. A fundamental operational restructuring, along with strategic moves to take advantage of industry opportunities, led to a successful turnaround. Revenues have grown substantially every year since.

While the purpose of this article is not to deliver a blueprint for specific transformation design (a subsequent article will be more prescriptive), we can touch on four key practices of the masters of transformation.

They make significant leadership changes
Almost every company we have studied recognized that a fundamental realignment would require a change at the top. While the formal transformation programs may not have been initiated simultaneously with a CEO change, the boards eventually brought new blood to the C-suite.

Such moves often have the additional effect of signaling a clear break from the past, including prior strategies. Tyco International and Hewlett-Packard Development Co., for example, both brought in new management to replace beleaguered executives who, it was determined, would have had a hard time initia-ting any significant change in direction. Others, such as Seagate Technology, a disc-drive manufacturer, made executive changes that would allow a critical transition in corporate culture.

In many cases, the CEO changes were accompanied by bench clearing—sweeping out many other top executives, both business unit leaders and functional heads. Tyco, for example, replaced almost every top executive and even a number of its board members. Some companies, such as Maytag, made selective housecleaning moves, while others used the top management changes as a way to highlight a new focus on functions that would be key to the transformation.

In Tyco’s case, although the company had revenues of almost $40 billion from hundreds of business units, it did not have a corporate-level CIO until just a few years ago. When senior management recognized that the change in focus from a company built on acquisitions to one focusing on operations would require key IT support and supply chain optimization, the company acted quickly to hire an executive-level IT chief.

They announce a formal transformation program
Another practice common among the companies that successfully recovered from poor performance was the formalization of a fundamental transformation program. This served to signal, both to external and internal constituencies, that big changes were on the way. The internal element is critical: In some cases, middle management and even senior executives can have a “this too shall pass” reaction to what they may perceive as grandiose but largely empty promises of change.

While the exact nature of the transformation was specific to each company, most programs included specific metrics that would serve to define success. These included debt reduction, profitability measures and a specific goal for shareholder return. At Staples, for example, return on net assets became the barometer for measuring the success of the office-supply retailer’s transformation.

A few companies bucked the trend and did not officially announce a formal transformation program. Still, for all intents and purposes, they made such far-reaching changes that there was no doubt that such an effort was under way.

For example, when PepsiCo experienced a significant inflection point, management acted quickly, first selling off the company’s restaurant businesses in 1997 and then divesting its bottling assets in 1999 (see chart, beside). The company then made clear its intention to diversify away from soft drinks by making splashy acquisitions of Quaker Oats Co. and South Beach Beverage Co., and with its foray into the booming health-food business. Now, although PepsiCo has a smaller asset base than it did a decade ago, its revenues have easily surpassed those of the mid-1990s.

They align their costs with their new direction
Successful transformation programs rigorously realign the total cost structure with the desired new direction of the business. While this often involves significant cost cuts, it is not cost cutting for cutting’s sake; nor does it involve an across-the-board percentage lopped off every budget. Instead, the new strategic direction or business refocus is examined to determine what cost structure is appropriate to both achieve the strategy and meet the financial goals. This exercise and the resulting structure include not just headcount but facilities, product lines and R&D as well.

Once these cost decisions are made, successful responders to market triggers do not allow themselves to succumb to a slow death—they announce sweeping cost cuts and move quickly.

Many of the companies that recently recovered from revenue stalls initiated workforce reductions of up to 10 percent. At times, the cuts were even greater. Appliance maker Maytag cut 20 percent of its payroll, mostly throughout 2004. And Tyco not only initiated 7,200 job cuts between 2003 and 2004, it also closed more than 600 facilities.

They return the focus to the customer
For many companies, size and geographic expansion bring on complexities that seem to conspire to insulate them from their customers. Central to many successful responses to trigger events is a return to the customer as the focus and driver of key business activities such as product design.

PepsiCo recognized a disconnect between its product offerings and the evolving taste preferences and concerns of consumers, who were increasingly demanding healthier snacks. Shaking off some failed early attempts to capture this market (by offering fat-free pretzels and chips, for instance), PepsiCo kept tracking customer buying habits and refining its offerings. The company now has a robust product development process that combines healthier snack fare with a product line that extends beyond conventional soft drinks to include juices and bottled water.

At Staples, management realized that the company did not have a clear point of differentiation with its customers. The company’s “Easy” campaign—a companywide marketing campaign in which Staples promises to help make it easy for people to buy their office products—returned a focus to clear customer needs. Most important, the initiative was backed up by a thorough revamping of the company’s supply chain to make the strategy successful.

Seagate Technology had a history of basing product development on input from its largest corporate customers. But the company realized that as the technology market changed, the demand for disc drives would come not from these customers but from individual end users of such products as personal music players. So Seagate greatly expanded its market research: It reached out to younger people for its consumer insight, and it supported this effort by pairing engineers and salespeople, thus creating cross-functional teams to figure out how to get these newer products to market much faster.

Yet some management teams delude themselves about the nature of their transformation” efforts. In the mid-1990s, one US manu-facturer undertook a series of what it described as "transformational changes," beginning with an overhaul of its global operating structure. The initial program was quietly shelved four years later and succeeded by a new one focused on cost cutting and leadership changes. This effort, too, failed—as did the one that followed it. What did the company have to show for a decade of "transformation"? Plummeting sales, shrinking market share, a collapsing share price and a humiliating downgrade of its debt rating.

Why did these efforts fail? We believe they were not fundamental transformations as we have defined them. This particular company’s actions were too piecemeal and too late, and emphasized incremental cost cutting instead of a restructuring tied to the key factors for success in its industry, especially innovation. The cost cutting took place with little or no regard for its effects on the manufacturer’s customers. At the same time, there was little alignment among senior management, which meant that it was easy for others to sabotage transformation efforts. And many longtime middle managers were guilty of the corrosive “this too shall pass” response we referred to earlier.

Although most Fortune 250 companies have experienced revenue stalls during the past 30 years, some have managed to avoid them altogether. For the most part, this was less the result of luck than of proactively initiating basic transformations before there was a financial, organizational or performance problem. While each story is different, the actions these companies took are similar to those taken by companies that successfully reacted to triggers, indicating that these key factors for successful transformations can also keep companies out of danger in the first place.

H.J. Heinz Co. is a good example of a company that avoided such inflection points between 1975 and 2005. It undertook actions similar to those of successful trigger responders—bringing in new top management, creating significant change programs and making deep cost cuts. Late in 2002, the food producer declared it would pare down substantially; by April 2006, it had shed 30 percent of its workforce (partially through divestitures), shuttered 15 percent of its facilities and cut its number of SKUs by almost half.

Companies that avoid triggers may do so because they stay more alert to danger signs—those events (whether financial, operational or market-related) that can precipitate a big drop in valuation. Still, there is no universal threshold, and each industry and company will have its own alarm levels.

The key is that successful companies—and high performers—are always looking for the waterfall around the next bend in the river and always prepared to react quickly to keep their boats afloat and moving in the right direction.

To successfully manage turbulent waters, companies must fully commit to fundamental transformational efforts. Though such transformations are often difficult and disruptive, the alternative is to risk perishing in the maelstrom.

About the authors
Arthur R. Bert is the global lead of Accenture’s M&A and Corporate Strategy group. He has more than 20 years’ experience in mergers and acquisitions, merger integration and strategy consulting. Prior to joining Accenture, Mr. Bert was the managing director for Asia Pacific with A.T. Kearney, where he also led its Global Mergers, Acquisitions and Alliances practice. Mr. Bert is based in Boston.

Kristin L. Ficery is an Atlanta-based senior executive in the Accenture Strategy service line. Working with both small and large organizations, she focuses on corporate strategy, pre-merger and post-merger integration, reengineering and strategic transformation programs. Ms. Ficery, who has authored numerous articles and has lectured on M&A and transformation, oversees research and thought leadership within Accenture’s Corporate Strategy group.

Michael K. Ostergard heads Accenture’s Shareholder Value Domain group. Mr. Ostergard, who is based in Atlanta, is also a senior executive in the company’s Strategy service line and has been with Accenture for nine years. His background prior to joining Accenture includes managing inter-national acquisitions for a global Fortune 100 beverage company.

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